N.Y. Attorney General Cuomo opens probe to learn if 8 banks misled credit raters

By Tomoeh Murakami Tse
Washington Post Staff Writer
Friday, May 14, 2010

NEW YORK -- New York Attorney General Andrew M. Cuomo has launched a probe into eight large banks to determine whether they provided misleading information to credit-rating agencies, according to sources with knowledge of the investigation.

Cuomo's investigation is focusing on the relationships between the banks and the agencies that rated certain mortgage-related securities packaged by the banks and sold to clients, said the sources, who spoke on the condition of anonymity because the investigation is ongoing. Investigators are looking at whether the banks gave false information to the agencies about the assets in the securities to get better ratings, the sources said.

The probe, which is in a preliminary stage, comes as large banks face increasing scrutiny from regulators and federal law enforcement authorities for various activities during the years leading up to the financial meltdown.

Cuomo's office issued subpoenas to Citigroup, Goldman, Morgan Stanley, Merrill Lynch (now owned by Bank of America), Credit Suisse, Deutsche Bank, Credit Agricole and UBS. The three major rating agencies -- Standard & Poor's, Moody's Investors Service and Fitch Ratings -- have also been subpoenaed, according to two sources with knowledge of the matter.

"We believe the bank acted appropriately and will cooperate with the authorities to substantiate our position," said Ted Meyer, a spokesman for Deutsche Bank.

Representatives for Bank of America, Citigroup, UBS, Credit Suisse, Moody's and Fitch said their firms were cooperating with the investigation. Goldman Sachs, Morgan Stanley and Standard & Poor's declined to comment. Credit Agricole did not return a message seeking comment on Thursday.

The rating agencies have come under intense scrutiny in recent years, criticized in congressional hearings for contributing to the financial crisis by giving top ratings to mortgage securities that later collapsed as the housing market declined. On Thursday, the Senate approved an amendment to financial regulatory overhaul legislation that would impose tough restrictions on the firms that provide credit ratings.

Critics have often portrayed the rating agencies as conflicted entities that worked hand in hand with the financial institutions whose products they were paid to rate -- in this case, the Wall Street banks. The mortgage securities were sold to investors around the world, helped by the AAA-ratings that prompted risk-averse investors such as pension funds to purchase them.

Cuomo's office investigated the rating agencies in 2008, saying he wanted to scrutinize their role in the meltdown of the subprime mortgage market. In a June 2008 settlement, the agencies agreed to require banks to provide more information on mortgage securities. The settlement also required the agencies to change their fee structures for those products to address concerns that banks shopped for favorable ratings between the three firms.

Cuomo's latest inquiry, first reported by the New York Times, looks at whether the rating agencies were deceived by the banks, including whether banks took advantage of loopholes in the rating agencies' models, one source said.

Since last year, the Securities and Exchange Commission has been collecting information from a number of Wall Street banks on complicated mortgage-related products called collateralized-debt obligations. Last month, it charged Goldman Sachs with civil fraud, alleging the firm sold clients a CDO linked to the value of home loans that was secretly designed to fail. Goldman has denied those allegations.

Jerry Markon contributed in Washington.

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